Investment advisors Lazard hail competitivness of large-scale PV, lukewarm on rooftop

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The Lazard report favours utility-scale PV over other segments, apparently for the cost reduction opportunities offered by scale. Image: SunEdison.

Large-scale solar and wind can already compete on price with traditional generation in some parts of the world, even with the price of natural gas falling, according to financial advisory and asset management firm Lazard.  

Lazard published two studies this week on the levelised cost of energy (LCOE), one for what it called “alternative energy” technologies which include solar PV, fuel cells, biomass and onshore wind, while the other study focused on developments in energy storage.

The former is in its ninth annual edition, while the storage report is the first to be produced by the company. In 'Levelised Cost of Energy Analysis 9.0', Lazard highlights that utility-scale solar costs have fallen by 25% on average in just one year – a total fall of around 80% since 2009 – while large-scale wind has enjoyed a 60% drop in costs since then, price declines that Lazard described as “dramatic”.

Conversely, Lazard claimed that rooftop solar still requires subsidies in much of the world to be competitive, due partly to the difficulty of building scale from smaller installations and also the complexity of the development and installation process relative to PV at larger scales.

While community solar installations – shared arrays that are either ground mounted or rooftop – offer a better scope for scaling up, Lazard sounded a note of caution that in both instances, utility-scale remains much cheaper. Even so, utility-scale projects of all types – including conventional and nuclear generation – face challenges to their development including policy uncertainty and high absolute costs.

LCOE metrics

The levelised cost of energy is a metric that has been used frequently in the US to compare various technologies and tech applications and aims to take into account as many variables contributing to the overall cost of energy. In solar PV, for example, some LCOE methodologies take into account permitting and other “soft costs”.

For Lazard’s study, the firm determined the cost per megawatt-hour of energy in US dollars required to give equity holders a return on their investment equal to the cost of equity capital. It kept the equity structure consistent across different scenarios in order to compare competing technologies, not “the benefits of financial engineering”, the report said.   

While Lazard appears to be joining a number of other financial institutions in hailing the growing competitiveness of renewables, the firm claimed that it does not foresee conventional generation being pushed out of the baseload mix in the near future. Instead, the report claimed, using alternative energy generation as a complement to traditional power sources will be “the optimal solution” in “many regions”.   

In particular, the report was sceptical on the short-term competitiveness of rooftop solar and even said that regions with support schemes favouring rooftop solar over utility-scale through subsidies were causing “intelligent system-wide integrated resource planning and policy” to “distort”.

‘Cost-effective method of carbon abatement’

While the authors refer to a global picture presented in both the alternative energy and energy storage reports, in reality much of the data and insights presented focused on the US.

Externalities such as environmental impact of fossil fuels and the social benefits of distributed generation were not taken into account by Lazard’s study, however, even in those cases where alternative energies have already reached grid parity.

Despite this the report did examine the costs of carbon abatement as a separate metric for comparison, and found that, especially compared to coal, utility-scale solar and wind could be a cost-effective way to limit emissions. Policies designed to promote these alternative energy technologies, Lazard said, “…could be a particularly cost-effective way of limiting carbon emissions”. The total cost per megawatt-hour of energy produced from a coal plant came in at US$320/MWh, for a LCOE of US$65/MWh, while the equivalent figures for crystalline utility-scale PV installations with single-axis tracking stood at US$283/MWh and US$58/MWh respectively.   

The study also did not look deeply at complementary technologies and the permutations of alternative business cases – for instance Lazard admitted that in taking into account the LCOE and therefore rate of return on investment for commercial and industrial rooftop solar, it did not consider the use of PV to mitigate demand charges.

Either by using a self-consumption PV solution, such as an east-west rooftop PV array, or PV paired with batteries, businesses in regions where time-of-use and peak use charges are prevalent such as the USA are able to significantly reduce their bills. In the US, a demand charge bill can be as much as 50% of a business’ total electricity costs, making this use of batteries “increasingly compelling to certain large energy customers”, Lazard said.

The firm did look at demand charge management in its energy storage report and indeed in the LCOE 9.0 report referred to the “virtuous cycle” of cost declines in energy storage driven by higher volumes of renewable energy deployment, which in turn were driving greater cost declines, covered in more detail in the storage report.

6 October 2021
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